FOREX-Dollar retreats ahead of Fed meet, hits 1-mth low on yen
* USD/JPY touches one-month low, threatens chart support
* USD under pressure ahead of Fed meeting
* Market suspicious Fed may try to bolster dovish forward guidance
* Plenty of event risk ahead with ECB and BoE meeting, major data
TOKYO, July 29 (Reuters) - The dollar slumped to a one-month low against the yen on expectations that the Federal Reserve will affirm at its monetary policy meeting this week that it intends to keep interest rates low for an extended period.
The dollar index, which shed 1.2 percent last week for its third straight weekly loss, is holding just above a key chart support, a break of which could spur more loss-cutting in holiday-thinned trade.
The yen was the biggest mover in Asian trade, with the dollar/yen falling 0.5 percent to 97.80 yen, having fallen as low as 97.635, its lowest since late June.
A big fall in Japanese shares prices is also prompting some accounts, such as algorithm players, to automatically sell the dollar/yen, which has had high correlation with the Nikkei share average ever since Japanese Prime Minister Shinzo Abe pledged to adopt a bold strategy to end deflation.
The Nikkei is falling partly because a stronger yen hurts Japanese exporters. But the relationship between the two assets is complicated because a fall in shares could spark rally in yen as well. Makoto Noji, senior strategist at SMBC Nikko, said that would be understandable considering that rise in share prices could raise inflation expectations.
Years of deflation has made the yen a relatively strong currency until Abe came to power late last year, pledging to end deflation.
"The yen seems to be moving on its own factor, namely the fall in the Nikkei." Noji said.
The Nikkei fell 2.3 percent to a four-week low.
The dollar has an important support around 97.50 yen from the bottom of Ichimoku cloud, a break of which would send a strong bearish signal.
The dollar was also under pressure broadly ahead of a two-day policy meeting by the Federal Reserve starting on Tuesday.
JPMorgan strategist John Norman said an article in the Wall Street Journal last week had suggested the Fed would consider changing its forward guidance in an attempt to convince markets that rates will stay near zero for a long time to come even if it does begin tapering asset buying.
"The article has raised the risk that the meeting outcome will be more dovish than originally anticipated," said Norman.
Against this backdrop, the dollar index fell to as low as 81.506, its lowest level since June 20.
It has important supports around 81.50 from its 200-day moving average as well as 76.4 percent retracement of its rally from mid-June to early July.
Apart from the Fed, this week will be a busy week for central banks with both Bank of England and European Central Bank holding policy meetings.
"Our base case is for no significant changes at each of these meetings, but the tail risks around the events have certainly increased, particularly for the FOMC and the BoE," said JPMorgan's Norman.
The BoE and ECB are expected to repeat or refine their respective versions of "forward guidance" that policy will stay loose for an extended period.
The euro was hovering at $1.3293, just below a five-week peak of $1.32975 hit on Friday. Option barriers blocked the way around $1.3300 while the next major chart target was the mid-June high of $1.3415.
The market is also bracing for a raft of major economic data including manufacturing data from China and U.S. growth and jobs figures this week.
The advance reading of U.S. gross domestic product (GDP) for the second quarter on Wednesday is expected to show annualised growth of just 1 percent.
The data will also be subject to major benchmark revisions, the first since July 2009, which could raise the level of GDP and perhaps change the past pace of growth.
Thursday sees a range of manufacturing data from around the world, starting with the official China PMI. The market is braced for a dip under 50 and a weak result will only heighten fears of a hard landing for the world's second largest economy as it struggles with a loss of momentum in growth.
Friday features the influential U.S. payrolls report with forecasts favouring a rise of 185,000 for July and a dip in the jobless rate to 7.5 percent.
A strong report would support the case for the Fed to start rolling back its stimulus in September and so underpin the dollar.